A country’s dependency on the income from tax has been increasing from time to time. The increasing demand of economic development financing becomes the key factor. However, levying the tax as much as possible is not an easy case, especially, in the middle of a tight global economic competition as well as the ingenuity of taxpayers in seeing loopholes in a tax provision.
Besides Base Erosion and Profit Shifting (BEPS), the world has been aroused by the plans of some countries competing in cutting down the tax rate. China, India, United States (US), and numbers of country in European territory are the catalysts of this tax “tariff war” issue.
Even the plans of tax rate reduction becomes the ticket to the success of some world politicians to sit in the presidential position. Donald Trump, for example, has made it to the 45th US Presidency after promising tax rate reduction in his campaign.
The same applies for Emanuel Macron, the young politician that has succeeded to become the youngest French President in history. One of the promises in his campaign is reducing tax rates to save the economy of the Napoleon’s Country from the threat of economic crisis.
The domino effect of this tax tariff war has occurred throughout the globe, including Indonesia. Recently, the President Joko Widodo has shared his wish that Corporate Income Tax rate should be cut down to be more competitive than that of the neighbouring countries. Thus, the Income Tax Law should be revised once again.
Income Tax Rates in ASEAN
|
Country |
Individual Income Tax |
Corporate Income Tax |
|
Indonesia |
5% - 30% |
12.5% - 25% |
|
Malaysia |
0%-28% |
25% |
|
Singapore |
0%-22% |
17% |
|
Thailand |
0%-35 |
20% |
|
Cambodia |
0%-20% |
20% |
|
Brunei Darussalam |
0% |
18.5% |
|
Vietnam |
5%-35% |
22% |
|
Myanmar |
0%-25% |
25% |
In fact, the tax problem in Indonesia is not merely about the high or the low of a tax rate. According to the Indonesian Professor in Taxation Prof. Dr. Gunadi M.Sc., Ak, the most important thing to note is the tax rate should be made moderate or equal to that of the neighbouring countries. The next thing to take into account is the effect of the tax rate adjustment (increase or reduction) toward the state revenue. Indeed, the low tax rate is potential to attract the investment and is expected to retrieve the money of Indonesian citizens from overseas.
Tax Compliance Paradox
Tax Amnesty program shall become a lesson. Even though assurance of tax amnesty has been offered by only settling the redemption with considerably low rate, the amount of assets repatriated by the Indonesian citizens from overseas in fact only reached up to IDR147 trillion from the asset potential of thousands trillion rupiah. The redemption money received in the state treasury of IDR130 trillion is not even significant to meet the tax revenue target.
To put it in another way, the voluntary compliance of the taxpayers is not enough. An unequivocal and equitable tax system is necessary to force the taxpayers to comply with its obligation.
Many things are more crucial and urgent to find solution for than reducing Corporate Income Tax rate—particularly about the taxpayers’ compliance considered lacking as well as the limitation of tax authority in conducting tax collection.
The issue about the low compliance of taxpayers shall become an evaluation and a self-introspection of the tax authority. This issue of compliance may raise either from the bad demeanours of the taxpayers, or from the existence of loopholes that allow it.
Closing the Loopholes
It is important to consider that not all the act of tax avoidance is illegal. The attempt to lessen the tax obligation by taking advantage of the loose point of a regulation is actually possible before law, even though the vice versa should apply from the ethical perspective.
As an instance, it is the manipulation of profits using the affiliated transaction transfer pricing by business group to press the amount of taxes. This practice is common in business world, but a disaster for the state treasury.
Another case recently blown up to public is the tax dispute dragging some internet based data providers or over the top (OTT) companies. They have been obtaining material amount of profits from the utilization of their applications or digital products in many countries, including Indonesia. However, the tax paid is small or even nil since they use their business network in some tax haven countries. Surely it is ethically wrong, but before law, no regulation to be used as a base to tax the OTTs, which are mostly the world digital giants.
It is not to mention other businesses deducing big profits from transactions out of law detection and supervision from the tax authority (underground economy). Business doers indicated in this sector are mostly micro, small and medium (UMKM) business. The chance of large-scale business doers to gain profits from the underground economy is still open, though.
Income Tax Law revision may, at least, be a solution for the problem arising from any bias transactions. Among others, it can be by imposing tax with minimum rate for companies having consecutive loss in certain periods. This option shall be reconsidered to minimize the act of tax avoidance by business group through transfer pricing.
In addition, OECD recommendation to add “Digital Presence” as criteria for tax subjects related to Permanent Establishment is also important to be adopted in the Income Tax Law revision. By doing so, the government will have a clear base to impose tax on profits gained by OTT from the utilization of their digital products in Indonesia.
Speaking of underground economy, which is mostly from the UMKM business, a special approach is needed to optimize the tax levy in this sector. Among others, by giving discretion to government to periodically adjust the limit of turnover value that becomes the base of taxing UMKM based on macroeconomic development. Moreover, for the tax imposition to be more optimal, sectorial approach and different tax rate are needed upon income of the UMKM engaging in manufacturing, trading and service sectors.
The tax object expansion shall also be conducted, for example by targeting the inherited assets with certain value. All types of inheritances with any value have been exempted from tax object. And, that has been misused by the taxpayers to report the assets that should be taxable as inheritance in the tax return.
All of it is like pieces of puzzle from a big framework of tax reformation. Therefore, revision to the Income Tax Law cannot be made partially, but it shall be simultaneous with the amendment of the other related provisions—especially, the General Provisions and Procedure of Taxation (KUP Law) and Value Added Tax Law.
In brief, the revision cannot be merely about the reduction or increase of Income Tax rate. Yet, it shall be the part of tax reformation and supported by an administrative system that is effective and efficient, as well as equitable.
